It was just three years ago that the Journal Register Co. filed for bankruptcy, its collection of small local newspapers hit hard by the economic crisis and the secular decline of the newspaper industry.

Through it all, Paton emerged as the industry’s most vocal cheerleader for a digital-first culture — and that was even before “digital first” went from a mantra to the name of a new parent company that would also run the much larger MediaNews chain of newspapers. JRC reported digital revenue growth as strong or stronger than their peers and seemed to be making good progress towards a company-wide culture change.

The Company exited the 2009 restructuring with approximately $225 million in debt and with a legacy cost structure, which includes leases, defined benefit pensions and other liabilities that are now unsustainable and threaten the Company’s efforts for a successful digital transformation.

From 2009 through 2011, digital revenue grew 235% and digital audience more than doubled at Journal Register Company. So far this year, digital revenue is up 32.5%. Expenses by year’s end will be down more than 9.7% compared to 2009.

At the same time, as total expenses were down overall, the Company has invested heavily in digital with digital expenses up 151% since 2009. Journal Register Company has and will continue to invest in the future.

Journal Register expects to emerge from bankruptcy in around 90 days; operations will continue uninterrupted during the process.

I. Room for further consolidation?

JRC is owned by Alden Global Capital, a hedge fund that has investments across much of the publicly traded U.S. newspaper industry. Those investments, combined with its merger-without-merging with MediaNews last year, has led some, like our own Martin Langeveld, to posit that Alden is pushing for a major consolidation of the newspaper industry.

JRC will apparently enter bankruptcy with a buyer at the ready — something called 21st CMH Acquisition Co., “an affiliate of funds managed by Alden Global Capital LLC,” which has submitted a signed stalking horse bid. So it appears that, in the end, Alden will still be in control, with Paton continuing as CEO.

(I’m not sure how much to read into the creation of something called an acquisition company — is it just to acquire JRC, or is it a staging area for further acquisitions and consolidation, a sort of decades-later echo to what Gannett did buying up family-owned papers? Does 21st CMH stand for “21st Century Media Holdings”? Just a guess.)

Newspaper valuations have for the most part stopped plummeting — if only because there’s only so far for a still-profit-making company to fall. (Year-to-date, some are actually up in stock price: The New York Times Co. is up 21.5 percent, Gannett’s 13.5 percent.) But it’s reasonable to think there are still any number of companies that would be happy to find an exit to scale. By re-buying, in effect, a slimmed-down JRC, Alden seems to be showing it’s still interested in that model.

(Although it’s more than a little crappy that JRC’s employee FAQ says decisions about everyone’s job status will be “made by the ultimate purchaser” — when that ultimate purchaser is apparently just another arm of the current owner. It’s theoretically possible that, at a bankruptcy auction, someone could outbid Alden for JRC, but it seems highly unlikely; Alden’s one of the few folks wanting to put money into newspapers rather than pull it out.)

II. A second shot at shaving debt

It’s worth noting that Paton didn’t become CEO until after the last bankruptcy was concluded. (Paton joined JRC’s board in August 2009 when the company came out of bankruptcy; he became CEO in early 2010.) Paton is arguing now that the terms of the previous bankruptcy were built on higher hopes for print than has since proven justified — that the company didn’t shave enough off its debt and contractual obligations to hack it in today’s business.

We’re on the right track with digital revenue, he’s saying, but we’re still handcuffed by fiscal decisions made from a print-is-healthy mindset:

All of the digital initiatives and expense efforts are consistent with the Company’s Digital First strategy and while the Journal Register Company cannot afford to halt its investments in its digital future it can now no longer afford the legacy obligations incurred in the past.

Many of those obligations, such as leases, were entered into in the past when revenues, at their peak, were nearly twice as big as they are today and are no longer sustainable. Revenues in 2005 were about two times bigger than projected 2012 revenues. Defined Benefit Pension underfunding liabilities have grown 52% since 2009.

Timing is, truly, everything. The newspaper companies that made terrible-in-hindsight decisions to bet on print at peak valuations — McClatchy buying Knight Ridder, for instance — were stuck with crippling debt obligations. But if you just stuck around long enough, that major metro that cost $562 million in 2006 could be had for $55 million in 2012. Alden, as a fund, focuses on distressed assets, those available at market values below their true value. (You can see why they’d be interested in newspapers.)

JRC seems to suffer from an analogous problem: It went through its bankruptcy at a time when some executives still thought the downturn was cyclical and not permanent. That left it with obligations that likely can’t be sustainable in the primarily-digital-revenue model Paton is building toward. One imagines that Paton won’t make that same mistake this go-round. (Sister company MediaNews already had its strategic, debt-trimming bankruptcy.)

That’s little comfort if you’re owed a share of those pension benefits now deemed “no longer sustainable,” of course. But the reality is that most newspaper companies are still not close to a footing that’s sustainable for the long term. Anyone who’s surprised by today’s news and thought the industry’s cuts were over is going to be disappointed for, at a minimum, several more years. (Go back and re-read David Carr’s prescient July 9 article, which put it plainly: “Two highly placed newspaper executives told me last week that while the industry had already experienced a number of strategic bankruptcies, more will most likely take place to deal with pension obligations.”)

III. It’s put-up-or-shut-up time

Paton’s been the industry’s most effective evangelist for a digital future. (It helps that he took over a newspaper chain not known for quality or tradition beforehand; he has a free hand that Arthur Sulzberger or Don Graham don’t to do deep institutional surgery.) JRC and Digital First have been great at putting forward an innovative face, from its heavy-hitter advisory board to small demonstration projects (Ben Franklin Project) and more substantial rethinkings of workflows (Project Thunderdome).

And they’ve done so in a way that is both open (they’re happy to tell you about the amazing things they’re doing) and closed (not reporting financial results, as publicly traded companies must).

But it’s been harder to be certain how Paton’s optimism has translated into results. Digital revenues are growing, but from an unspectacular base. Many of the company’s initiatives seem, while interesting, unlikely to move the revenue needle much. Print revenues are a problem, just as they are at its peers. Today’s release illustrates that JRC hasn’t yet found the magic formula.

But could Paton’s plan be a model for the local and regional newspaper industry as a whole, as some have dearly hoped?

Paton now will have his chance to prove it. In around 90 days, he’ll have had his chance to shed the costs he wants to shed. No longer will “we were built for print” be a good excuse; if two bankruptcies can’t clear out all those cobwebs, I’m not sure what could. “Digital first” will move from a slogan to a corporate name to a foundation of the company’s business structure.

The newspaper industry’s problem today is not that its leaders don’t know how to make money in media. Lots and lots of money still flows through newspaper offices every day. It’s that they can no longer make that money at the scale they could 10 years ago — but their cost structures are still tied to that old scale. That’s why the past half-decade has been a seemingly endless string of layoffs and cutbacks, shaving dollars and people to keep up with revenue declines, while still being stuck in a fundamentally print-driven structure.

Meanwhile, as newspapers were busy writing press releases about layoffs, their nimble online-native competitors have been able to start from a blank sheet of paper and build for a digital scale of revenue.

This bankruptcy will allow JRC to have get the closest thing the newspaper business has seen to a true reboot.

JRC papers should put out a once-a-month paper edition and publish digitally daily. The once a month paper edition will feed what void there still is for paper that digital can’t fill and will make the paper edition fat with articles and advertising, instead of the anemic fare they are as daily print papers.

The fact is, for all this inspiration and future planning, the news content stinks — these papers dont come close to their former selves in terms of quality at all, not at all, nor do their digital editions. Quality will be the last to return, if ever, after the restructuring of technology is done.

Guest

“Now all Paton has to do is deliver.” Isn’t that what he was supposed to do after the first bankruptcy?

Guest

So, that’s what they mean by digital first – “shaving” costs. Got it. I thought it might actually have something to do with digital media.

Thanks for the clarification.

http://www.niemanlab.org/ Joshua Benton

Once a month may be pushing it, but I would be surprised if some significant percentage of JRC dailies are less-than-daily in a year’s time.

http://www.niemanlab.org/ Joshua Benton

True enough. In Paton’s defense — and I think he’s a smart guy as well as a smart promoter — the list of newspaper companies that are better positioned for the future is pretty slim. Excluding the nationals (NYT/WSJ), which are playing a different ballgame, I don’t think there are, well, any.

(I’m talking just the newspaper pieces of their businesses; many newspaper companies also own profitable TV/cable/etc. enterprises that still have shelf life left.)The problem is that “most investment-worthy of non-national newspaper companies” is a really, really low bar to meet. Newspaper companies are dealing with something far more systemic than what an individual CEO has the capacity to counter. The really smart ones, like Thomson, sold their papers off before the ceiling fell in.

Istackdollars

Dimes are not cutting it. Practically forcing subscribers to not take delivery. So upset, its not worth the bother. Many wrong directions in this model

steve

do you think it would have been wise to mention the amount of debt the previous jrc had before they ‘shaved’ it to a mere $225m?

i like jxpaton and crew, but a previous comment hit it on the head

http://www.niemanlab.org/ Joshua Benton

“It reported $596 million in assets as of Nov. 30 [2008] and $692 million in debt, including unpaid interest.”

It’s pretty sad that the company – like so many others – is laying the blame for its financial woes at the feet of the people who worked for so many years under a contract they expected to be honored, and will now likely be picked up in part through the pension benefit guarantee fund. If this is the digital future, it looks a lot like the gilded age past.

Skelley

The problem is that you can’t have it both ways. You either have a print product or you have a digital product. To limp along (for years in some cases at some of the papers) trying to do a half-ass job at both print and digital has not and will not work. It’s time to make a choice. Clear out the old guard who are still stuck in the 1970s and stop the razzle dazzle of “innovative” projects with catchy names. It isn’t working. Readers are fed up. It’s time to get back to real journalism for the real world. Pick your format and just do it!

Newsytype

As a former JRC employee, currently employed by a competitor, and also a customer of a JRC newspaper, I find some humor in this effort to explain this recent business maneuver.

JRC’s biggest issue is, has been, and will continue to be the fact that their products, online and in print are embarrassingly bad. Mr. Paton can push, prod, and pull every digital rabbit out of the hat he wants. But until the company decides that actual news content, editing, design, and paying its writers a working wage is important, that company will continue to bleed readers and viewers and any decent journalists.

And don’t tell me it’s just a business, that happens to sell newspapers as its widget. Explain that to my neighbors who have dropped the local JRC paper one after another after another. Has anybody looked at the fall-off-the-cliff circ numbers of JRC papers that far outstrip what has happened at most other newspaper companies.

And since most print companies still get 90% of their revenue from print, they really should care. You can’t transition newspaper readers to the digital side if the product gives them no reason to make the jump.

steve

thanks.

i may be your only reader that thinks there’s a lot more to come if johnco couldn’t make a go of its first filing that ditched over 2/3 of debt while keeping all its assets.

Istackdollars

I agree. why lay blame on pension. Don’t employees deserve that. Shame that Paton could not manage them out of restructure. Just wonder what the Yardley and NY property costs are, The Digital dream he has at the speed he wanted is not possible.

http://www.niemanlab.org/ Joshua Benton

I have to say, of all of JRC/DFM’s moves the past few years, the decision to start paying for New York real estate is the biggest puzzler. Of all the places in the world you could put it, why there?

Istackdollars

Not just in real estate. Overhead and expenses. And again why there? You have a whole floor in PA

Guest

I know he’s smart. I’ve worked for him. And I know first-hand that it’s like slogging through thick mud trying to turn the newspaper culture and business model around. At times, he has appeared to be doing the best he can while being caught between an entrenched legacy environment on one side and Alden Global’s unrealistic ROI timetable on the other. However, his excuses are starting to wear thin.

It became clear pretty quickly (at least to the folks at MediaNews Group) that he didn’t really want to be a hands-on newspaper company CEO. He’s very much a loner, and he has bigger plans for himself — with the emphasis on “self.” Most of his energy has been directed at expanding and ramping up Digital First Media’s operations in New York, at the expense of JRC and MNG papers and personnel. DFM just leased impressive office space in NY and has been recruiting heavily on Twitter the last couple of months for senior, highly paid positions — while undoubtedly knowing JRC was headed for bankruptcy.

He sounds like a visionary at first, and he truly is. Then comes the day when you realize that he’s not looking “out there” toward the future of newspapers anymore. He’s looking in the mirror.

Jeffamy

What’s interesting is that Alden had bought the senior company debt as well as the equity, allowing it to credit bid and essentially engaging in a loan-to-own strategy. They won’t be out any cash, only the company’s other creditors, like its pensioners. It would be interesting to see what the bankruptcy turns up, especially if some of the other creditors are not cool with this plan. Did Alden acquire the debt when it bought the equity, or did that happen more recently?

Guest

And plenty of floor/office space available in Denver Post/MNG building, with more opening up.

Guest

Never worked at JRC, but have had some dealings. In my experience, the ‘digital first’ mantra – like many newspapers, has not woven itself into the boots on the ground. I was at one of their offices in PA a month ago. What I saw were newspaper people, not digital (both sales reps and senior managers). Real change is never going to take place until they get someone senior (like me) who is willing to get in the trenches to motivate, teach, guide, push and fire when necessary.

Guest

Interesting. But this bankruptcy also represents a total failure in the strategy being pushed by Jay Rosen and Jeff Jarvis, both of whom were hired as advisers and had significant input in shaping the company when it emerged from its last bankruptcy. Surprise, surprise, overexposing yourself on twitter doesn’t make you qualified to shape the future of the news business.

I think there are still very legitimate criticisms to be made of JRC’s editorial products — a lot of them are still really far from being high quality, IMO — but I don’t think this bankruptcy can really be used to say either good or bad things about “digital first” (lowercase) as a model.

Tony

At one point in time, in my career as publisher and CEO of our small family company, I thought I was missing the boat. Publishing companies were buying other publishing companies at staggering multiples and “synergies” were the buzz word. I kept thinking how were they going to pay their debts? How were they going to stay nimble and adjust as time passed? How were they going to keep their committed, quality employees? I just could not, for the life of me, figure it out.

Sure, various publishers made passes at our company and we declined. I made passes at other closely related publishing companies. Most declined my overtures because my valuations were too cheap. Journal register grossly outbid us on two occassions. I remember one of the new Journal employees telling me how their retirement plan was outstanding.

Now everyone says print is on its death bed and I better spend an awful lot of money quickly on digital or else. Yes, we are spending what is prudent on digital and are very happy with the results. We love the internet! What an easy way to expand our brands beyond the traditional newsstand and subscriber.

Bottom line…too much debt makes it impossible to adjust. Publishing brands are not dead. Basic business princples still apply.

http://www.niemanlab.org/ Joshua Benton

Louisiana Sportsman! I hope the bass are biting in Toledo Bend.

Tony

All good in Louisiana! Isaac notwithstanding. I’m sorry if I rambled on, I get very frustrated by all the gibberish. Louisiana Sportsman’s September issue was 348 pages!!!

Bill Schwab

“Digital First”…. That’s funny. They suck 12 percent of pay, cut their staff to virtually nothing and still get to go bankrupt so their hedge fund company can once again buy the assets under another name and not service the debt? Yeah… that’s something to be proud of.

Guest

This is now the third time I’ve tried to post a variation of this comment, hopefully the powers that be at Nieman will allow it.
This was a disingenuous response if I’ve ever seen one, crafted, so it would seem, to protect the ill-earned reputations of “Jay and Jeff.”
The business strategy and the push to a digital first production schedule was not produced in a vacuum. Those in the front office — with the help of well-paid advisors, including Jay Rosen and Jeff Jarvis — knew the company’s financial situation when formulating the strategy. That included the pension and debt obligations, long-term leases and anything else that would affect the bottom line. Paton has blogged and employees notes about how the strategy would produce new revenue while protecting the print product. Jay Rosen has talked about moving capital from the print cycle into a more digital production. THAT is digital first, small caps or not. and now that the boldest experiment in that change of strategy has failed — a second bankruptcy in 4 years is a failure by any measurement — you can honestly deflect the failure itself as neither a good nor bad thing about the model??? Equally, you’re not willing to lay any of the blame on the company or its advisors? Please.

http://www.niemanlab.org/ Joshua Benton

The powers that be haven’t been censoring your bold comments, Guest, no worries. And I hardly think my blog comments are going to have 0.0000001 iota of protective impact on anyone’s reputation.

If you really feel that it’s the nefarious doing of two NYC journalism professors that’s caused JRC to do poorly, I’d just ask: Who are the nefarious journalism professors to blame at every other local newspaper company in America? Because none of them are doing leaps and bounds better than JRC is. Is it a Medill prof who’s to blame for Tribune? Someone at Wash U to blame for Lee? Someone at Rice for Hearst?

and you’ll fine that digital revenue is up substantially, up more than at most/all other local newspaper chains, and that print is down around the same percentage as the newspaper industry as a whole (17% vs. 19%). Here’s what that means: Local newspapers are a really awful business these days, one that’s not going to improve materially in the near term. And to me it makes sense that, given that unfortunate truth, it makes sense to try to transition to another business as quickly as you can while maintaining the cash flow of your old business.

What does the future hold for JRC? I don’t know. Maybe this is a legally permissible slimming down of obligations that’ll serve to accelerate that transition to digital. Maybe this is Alden throwing up its hands at newspapers and thinking, “We can’t figure out what to do with this, to hell with it.” Maybe it’s a maneuver to finalize that merger with MediaNews or do some other sort of roll-up. Who knows? But I’ll repeat what I said earlier: I don’t see any other local newspaper companies that are on a markedly better path. Check back in a year, when another few chains have gone through similar pension-shedding bankruptcies, and we’ll see.

Guest

Holy smug! For someone who admittedly can’t figure out why the company is doing this, your tone is awfully condescending.
Your argument by question and hypotheticals fails to address the central point: why is a second bankruptcy for this company not proof that the digital first strategy is a loser for newspaper companies?
Everyone knows that the local newspaper business is struggling. Was that ever in question?
But when a company bets its future on a strategy and that strategy — even if it grew substantially — fails to produce the revenue to stave off bankruptcy, it’s a failure. Try to explain it away all you want, but that’s what’s happening here.

“Rick Edmonds at the Poynter Institute and Josh Benton at the Nieman Journalism Lab were saying much the same thing [as Jeff Jarvis]: Paton was on the right track. The bankruptcy was, in Benton’s words, “a reboot”. Payton just need the pressure taken off of him so that he could use the resources he had to continue to transform his papers into digital enterprises.
The problem, however, was that, so far, the digital strategy had, from a revenue standpoint, not become all that significant to the company – you’d be hard-pressed to find much value there. Or even the prospect of value.
Except, perhaps, PR value.” http://bit.ly/PbTvCv
Maybe instead of following the crowd with your analysis, you could make a case for why you believe there is value there. Then again, that would require practicing some, you know, journalism.

Guest

Oh wait, someone’s taken an actual look at their numbers. The strategy looks even more ridiculous in light of this form CJR:
“Of JRC’s $295 million in revenue last year, $167.1 million of it was print ads, $86 million was print circulation, and $30.1 million was digital ads. That means digital ads were 10.2 percent of JRC’s total revenue, up sharply from the pre-Paton era when it was a miserable 2.8 percent.
The question for Paton and JRC is how fast that digital revenue can continue growing. We’ve noted a few times that it’s far easier to post big growth percentages when you’re growing off a small base. When Paton took over, JRC had one of the lowest rates of digital revenues in the business. A good chunk of the 235 percent growth in digital revenue since was low-hanging fruit. You can see this from the trendline of growth, which, according to the bankruptcy filing, was 108 percent in 2010, 61 percent in 2009, and 33 percent so far this year.
It’s worth noting that McClatchy’s digital revenue was at least 17 percent of total revenue last year. The New York Times’s was at least 17 percent, including my rough estimates of its digital-subscription revenue (that number was 13 percent excluding About.com, which it has since sold). Gannett’s digital revenue last year was 21 percent of total revenue, which is something. Gannett!”
Oh wait, isn’t Gannett largely a local news company?

I don’t think there is a newspaper company with a better trendline. And that’s not to mention that JRC’s papers are far smaller and in far less digital-ad-savvy markets.

(JRC’s largest newspaper is the New Haven Register, 80K circ, and most of its papers are weeklies. It has only 20 dailies. Gannett has USA Today and 10 other papers larger than New Haven. And that digital number also includes all their broadcast properties — print newspapers are only 43% of Gannett’s revenues.)

As I said earlier, JRC is not a business I’d invest in, because there are ZERO local newspaper businesses I’d invest in. It’s a crappy business that’s going to get worse before it gets better. But as far as a digital strategy for a local newspaper company, I think JRC’s hard to beat.

Digital is still a small part of a terrible print business, but I think they’re headed in the right direction. And the fact that JRC, like its peers, has a terrible print business attached doesn’t tell us much one way or the other about its digital strategy.

A Carrier

As a carrier for one of the JRC papers, I’ve been relegated to receiving a small portion of my wage, with the hope that next week, I’ll be paid the balance. With gas $ pushing $4.00/gallon, I find it difficult to finance the delivery of JRC’s paper all the while crossing my fingers that the bankruptcy judge decides to release funds to the lowly carriers…..home delivery may be forced into a thing of the past….

Guest

Digital First, employees…last.

ahorita

As a staffer shaved off (or excreted, as Dilbert’s pal Wally says) from an MNG paper so Paton could meet his Alden obligations (and why a hedge fund is buying up news media properties is a big question with lots of downside), the announcement of this bankruptcy, and its oh-so-clever way of cheating its creditors and pensioners, was particularly galling. Paton is a blowhard. I don’t care if he’s smart — hell, so am I — his business model was always unrealistic as long as people were part of the mix, because the only way you can run a news operation solely on digital revenue is to get rid of payroll and benefits. Can’t remember if it was Paton or Buttry (another fatuous creep) who proclaimed the biggest obstacle to their success was the staff, but that massive display of public disrespect said it all. It’s looking more and more like someone is going to pinch Paton’s round head right off his neck, and I can only rub my hands with glee at the prospect.

You can
keep most of your stuff in bankruptcy. People always have
this fear of someone taking all their things away. I know I did! But the
exemptions for personal property are more than generous. I didn’t have to
answer for a single purchase or give up any of the junk I’d bought on credit
cards. While that sounds like a great thing, it’s really not. It was like
holding a “get out of jail free” card.